UK PPF sees returns of 25% boosted by hedging activities

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UK – The UK Pension Protection Fund (PPF) has seen its surplus increase to more than £1bn (€1.2bn), as investment returns of 25% boosted funding to 106%.

According to the lifeboat scheme's latest annual report, a combination of investment returns, levy income and the transfer of a number of insolvent funds into the PPF saw assets under management increase by £4.7bn year-on-year to £11.1bn.

However, despite the headline returns of 25.2% – translating to £1.7bn – return-seeking investments only boosted assets by £337m.

The remainder of the fund's strong performance was the result of its hedging activities.

As a result of the strong returns, the scheme also saw its surplus increase to £1bn, resulting in funding increasing to 106.9%, but PPF chair Lady Barbara Judge said the fund would not rest on its laurels.

Chief executive Alan Rubenstein added that its funding ratio had declined since the snapshot offered by the annual report.

"Increased claims on the PPF have already meant our own funding level has fallen from 106% in March 2012 to about 102%, and that levies are likely to rise in the short-term," he said.

The PPF also warned that its recent levy increase was unlikely to be the last.

Noting that claims to the PPF had outstripped its levy income last year, the report said: "If this pattern continues, it will inevitably feed into future levy increases."

Rubenstein added that the fund would remain "ever vigilant" in attempting to meet its goal of self-sufficiency – a 10% margin above liabilities – by 2030.

"While we are still on course to meet our aims of being self-sufficient by 2030, the probability of achieving this fell during the year from 87% to 84%."

Speaking with IPE ahead of the annual report's publication, Judge also expanded on comments in the chairman's letter that one of her priorities had been to raise concerns over the impact of an IORP Directive based on Solvency II for the UL's pension community with "all the relevant parties".

"If you look at Solvency II and try to fund up pension funds the way you fund up insurance companies," she said, "you are going to get the wrong results."

"It's going to be the perfect unintended consequences – it's going to look like you are making them safer, but, actually, what's going to happen is that people will increasingly close them, or they will fall over."

Her comments are in stark contrast to those of European Insurance and Occupational Pensions Authority chairman Gabriel Bernardino, who told the National Association of Pension Funds' annual conference last week that defined benefit in the UK was dead and that only a revised IORP Directive would revive it.